The financial competence of low income households in PNG : a report prepared for the Pacific Financial Inclusion Programme

This study examines the financial competence of low income households in Papua New Guinea (PNG). The financial competencies which have been measured were identified by asking low income households in both rural and urban areas to describe the financial activities they needed to be able to undertake in order for the household to be able to manage its cash-flows effectively.The findings from the study indicate these households are not able to effectively engage in the financial activities required for successful engagement with the money economy and the formal financial systems. Overall rural households are less competent than urban households. Of particular importance, the findings from the study indicate women in low income households are significantly less financially empowered than men. Households appear to be generally better at managing immediate and shorter term financial activities, and are less competent at managing longer term financial activities (including activities which require forward planning) and more complex financial activities, including activities which require engagement with the formal financial system. Overall, understanding of the cost of money was found to be very low. Functional English language ability was found to be a significant constraint to financial competence, influencing most financial activities measured by the study. Households which had financial products, which had a budget and in which household finances were managed jointly were found to be generally more financially competent than household’s which did not plan the household’s future income and expenditure, did not manage household finances jointly and which did not use financial products to facilitate the management of household cash-flows. Overall, men take a greater role in the management of household finances, although this may be result of more men having functional English language ability. Men are also more likely to report bank account ownership and usage of electronic transactions.Urban communities generally exhibit higher levels of financial competence than rural communities. This is likely to be influenced by the greater prevalence of wage and salary income and the need to communicate in English. The findings from the study suggest several key policy issues. The pervasive low levels of financial competence potentially expose low income households in PNG to several major risks. These include the risk of financial exclusion, the risk of exploitation by financial predators, and the risk of ineffective use of household cash-flows. There is a need to continue to focus on increasing levels of financial literacy and to increase the number of households which have access to the formal financial system and to focus on increasing the financial empowerment of women. There is also a need to increase the understanding of the cost of money, through both training and consumer protection. As households become increasingly involved with the money economy, a failure to understand the cost of money and the associated risks of using financial institutions and financial instruments carries significant risks for low income households, in particular in respect to poor financial choices and vulnerability to predatory practices. Continuing assistance also needs to be provided to households to enable better identification and management of household cash-flows.